Following bailout, Moody's downgrades Russia's No. 2 bank

8th July 2011, Comments 0 comments

Moody's ratings agency downgraded Russia's second-biggest bank on Friday following the bank's controversial acquisition of a weakened rival and then its own demand for cash.

The downgrade of VTB bank came only a week after the state-held giant was rescued from a financial hole left by its purchase of a stake in the Bank of Moscow -- the city of Moscow's main lender with up to $9 billion in bad loans.

But Moody's said VTB was now facing new risks that demanded a revision to negative from stable of its financial strength ratings and some other indicators.

The change "reflects a higher risk that the bank's capitalisation could weaken as a result of the planned consolidation of Bank of Moscow, a financially-stressed institution which recently required extraordinary support from the Russian Central Bank," said Moody's analyst Eugene Tarzimanov.

The Bank of Moscow's bad debts were disclosed only earlier this month and prompted the Central Bank to announce the launch of a $14.2-billion (9.9-billion-euro) bailout for the b ank, the nation's fifth-biggest lender.

They also led to question about how Russia's financial regulators could oversee the problem for so long and whether bad debts were more endemic to the country's financial system that initially suspected.

The immediate implications for VTB of the Central Bank bailout is that it will see its stake in Bank of Moscow rise from under 50 to 75 percent.

That impending share acquisition prompted VTB on Friday to announce the completion of what it said was the largest syndicated loan agreement in Eastern Europe's history.

VTB, Russia's second-biggest bank after Sperbank, said the $3.13 billion three-year credit would be financed by nearly 30 global financial institutions including Bank of America Merill Lynch.

Other lenders include The Bank of Tokyo and Britain's Barclays Capital along with France's BNP Paribas.

The Russian lender's Deputy Chairman Herbert Moos called the loan "an inspiring achievement" for VTB.

The Bank of Moscow has a strong consumer banking network and access to cash flows from Russian utilities payments that made it a prime target for VTB.

But it comprised the heart of a city property empire that unravelled with the construction collapse that followed the 2008 global recession.

The size of the bailout far outweighed analyst expectations and prompted the Standard and Poor's (S&P) ratings agency earlier in the week to extend VTB's CreditWatch status -- a list of institutions with negative immediate outlooks.

"In our opinion, the recent events surrounding (Bank of Moscow) illustrate lingering asset quality problems from the 2009 recession and gaps in the supervision of large financial institutions in Russia," S&P noted.

Regulators with liberal reputations such as Alexei Kudrin -- the hawkish finance minister who stepped down as VTB board chairman this year -- have come under some criticism for not raising alarm about the Bank of Moscow earlier.

Morgan Stanley said the size of the state portion of the Bank of Moscow bailout corresponds to four percent of Russia's total liquidity and may force the Central Bank to hike interest rates next year.

A Troika Dialogue note quoted by Dow Jones Newswires added that VTB "may well have to" raise its capital again next year.

But VTB rejected this suggestion.

"Measures undertaken by state authorities to support the Bank of Moscow will not affect VTB Bank public debt," VTB said on Friday. "The Bank is fully confident of its strong and stable financial standing."

© 2011 AFP

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